A Machine Learning Approach to Portfolio Risk Management
Risk measurement, valuation and hedging form an integral task in portfolio risk management for insurance companies and other financial institutions. Portfolio risk arises because the values of constituent assets and liabilities change over time in response to changes in the underlying risk factors. The quantification of this risk requires modeling the dynamic portfolio value process. This boils down to compute conditional expectations of future cash flows over long time horizons, e.g., up to 40 years and beyond, which is computationally challenging.
This lecture presents a framework for dynamic portfolio risk management in discrete time building on machine learning theory. We learn the replicating martingale of the portfolio from a finite sample of its terminal cumulative cash flow. The learned replicating martingale is in closed form thanks to a suitable choice of the reproducing kernel Hilbert space. We develop an asymptotic theory and prove
convergence and a central limit theorem. We also derive finite sample error bounds and concentration inequalities. As application we compute the value at risk and expected shortfall of the one-year loss of some stylized portfolios.
Damir Filipović
Damir Filipović holds the wissquote Chair in Quantitative Finance at the Ecole Polytechnique Fédérale de Lausanne (EPFL) and a Swiss Finance Institute Senior Chair. He also acts as head of the Swiss Finance Institute at EPFL.
He holds a PhD in mathematics from ETH Zurich and has been a faculty member of the University of Vienna, the University of Munich and Princeton University. He also worked for the Swiss Federal Office of Private Insurance as co-developer of the Swiss Solvency Test.
He is on the editorial board of several academic journals. His research focus is in quantitative finance and risk management. His papers have been published in a variety of academic journals including the Journal of Finance, Journal of Financial Economics, Mathematical Finance, Finance and Stochastics, and the Annals of Applied Probability. He is the author of a textbook titled Term-Structure Models.
David A. Sprott (1930-2013)
Professor
David
Sprott
was
the
first
Chair
(1967-1975)
of
the
Department
of Statistics
and
Actuarial
Science
at
the
University
of
Waterloo
and
first
Dean
of
the Faculty
of
Mathematics
(1967-1972).
The
David
Sprott
Distinguished
Lecture
Series was
created
in
recognition
of
his
tremendous
leadership
at
a
formative
time
of
our
department,
as
well
as
his
highly
influential
research
in
statistical
science.